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Bond Vigilantes, Still Invisible

US long-term interest rates have risen somewhat in the wake of the debt deal — and sure enough, we’re hearing warnings about “bond vigilantes” again.

OK, guys, first of all: interest rates have soared back to their levels of …. June.

Beyond that, it has been very clear, if you watch the ups and downs of long-term rates, that they reflect just one thing: perceived prospects for recovery, and hence when you might expect the Fed to move off the zero-rate
policy. Rates began rising a few weeks ago as data began to suggest a somewhat stronger recovery than previously anticipated (stronger, not strong — we’re still looking at years of very high unemployment).
They rose again in the past couple of days on the belief that the stimulus part of the tax deal would actually lift the economy to some extent.

What is true is that perpetuating the Bush tax cuts raises the probability of a fiscal crisis somewhere down the line; it’s very different from short-term stimulus spending, because it raises the prospect of
a permanent worsening of the outlook. But that’s not what is moving markets now.